Developments in US-Canadian cross-border insolvency proceedings | Practical Law

Developments in US-Canadian cross-border insolvency proceedings | Practical Law

Developments in US-Canadian cross-border insolvency proceedings

Developments in US-Canadian cross-border insolvency proceedings

Practical Law UK Legal Update 0-386-5773 (Approx. 3 pages)

Developments in US-Canadian cross-border insolvency proceedings

by Sam P. Rappos, Borden Ladner Gervais LLP
Published on 10 Jul 2009 • Canada
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Ontario Superior Court of Justice (Commercial List) sets out the factors to be considered in determining the appropriateness of authorising a guarantee for a Canadian debtor in connection with cross-border DIP financing.
In a number of recent United States and Canadian cross-border filings, cross-guaranteed debtor-in-possession (DIP) financing arrangements have been proposed. In the Companies' Creditors Arrangement Act (CCAA) proceedings of Indalex Limited et al (collectively, Indalex Canada), Mr. Justice Morawetz of the Ontario Superior Court of Justice (Commercial List) considered the implications of such DIP financing arrangements for debtors and their stakeholders, and the availability and terms of such DIP financing arrangements.
In April 2009, Indalex Canada obtained protection from its creditors under the CCAA, and the US parent of Indalex Canada and its affiliates (collectively, Indalex US, and together with Indalex Canada, the Indalex Group) filed for bankruptcy protection under Chapter 11 of the US Bankruptcy Code. The Indalex Group was in financial distress and required DIP financing to provide the funding necessary to restructure its business and financial affairs. One of the pre-conditions to the DIP financing was that Indalex Canada provide a guarantee of the DIP financing obligations of Indalex US (post-filing guarantee).
Indalex Canada sought Court authorisation to enter into the DIP financing agreement and the post-filing guarantee, and argued that:
  • Each were necessary to preserve the opportunity for the Indalex Group to seek a viable going concern solution.
  • Sufficient safeguards were put in place to protect the pre-filing collateral position of Indalex Canada's unsecured creditors.
  • Any potential prejudice in connection with the granting of the post-filing Guarantee was substantially outweighed by the potential benefit to Indalex Canada's stakeholders derived from the DIP financing.
Following a review of the evidentiary record and previous cases where the Court has considered proposed DIP financing that was conditional on a guarantee by a Canadian debtor of a US debtor's post-filing obligations, Mr Justice Morawetz held that DIP financing was required for Indalex Canada and set out the following factors as being relevant in determining the appropriateness of authorising a guarantee for a Canadian debtor in connection with cross-border DIP financing:
  • The need for additional financing by the Canadian debtor to support a going concern restructuring.
  • The benefit of the breathing space afforded by CCAA protection.
  • The availability or lack thereof of any financing alternatives, including the availability of alternative terms to those proposed by the DIP lender.
  • The practicality of establishing a stand-alone situation for the Canadian debtors.
  • The contingent nature of the liability of the proposed guarantee and the likelihood that it will be called on.
  • Any potential prejudice to the creditors of the entity if the request is approved, including whether unsecured creditors are put in any worse position by the provision of a cross-guarantee of a foreign affiliate than as existed prior to the filing, apart from the impact of the super-priority status of new advances to the debtor under the DIP financing.
  • A balancing of the benefits accruing to stakeholders generally against any potential prejudice to creditors.
The factors set out by Mr Justice Morawetz in the Indalex Canada CCAA decision provide a useful checklist of issues for debtor companies and potential DIP lenders to consider in building their argument that a proposed DIP financing with a post-filing cross-border guarantee is necessary, reasonable, and in the best interest of all stakeholders.